Bonny Moellenbrock
Advisor, LOCUS Impact Investing
- Bonny Moellenbrock, LOCUS' advisor, shares insights on how Community Development Loan Funds (CDLFs) can be used for impact investing.
This spring, the Global
Impact Investing Network (GIIN) and investment firm Symbiotics released The Financial
Performance of Impact Investing Through Private Debt, the latest in a
series of reports benchmarking impact investing opportunities in different
asset classes. For U.S. place-based investors, Community Development Loan Funds
(CDLFs) provide a particularly promising impact investing opportunity. The report analyzed data for the past five
years from 102 participating CDLFs across the country. Below I’ve shared some
of the highlights from this report relevant to foundations and others
interested in place-based investing.
About Community Development Loan Funds
Community Development
Financial Institutions (CDFIs) are mission-driven banks, credit unions,
venture capital funds, and loan funds that provide capital and financial
services to underserved communities to increase economic development and
opportunity. They are certified by the U.S. Treasury Department CDFI Fund. Community Development Loan Funds (CDLFs) are the most common type
of CDFI, providing financing and technical assistance for microenterprises,
businesses, commercial real estate, housing development, and community
facilities, all in economically distressed locations across the country. Most
are nonprofit organizations, focused on a particular state or region, and most
rely on grants and contributions in addition to returns from lending to fund
their operations. LOCUS Impact Investing’s parent
company, Virginia Community Capital,
is a $323m CDLF.
The report shows the diversity in CDLFs. Forty percent of
the funds analyzed focus on housing, 33% on local business financing, and the
rest provide financing for microenterprises and community facilities. Assets
under management range from $1 million to $1 billion, with the average and
median CDLFs at $55.2 million and $24.9 million, respectively. Growth of the
median has been a solid 12.4% since 2012.
The majority of capital invested in these funds – a significant
75% – is from institutional investors including pension funds, financial
institutions, non-governmental organizations, and foundations. The remaining is
provided by public funders (18%) and retail and other investors (7%). These
funders invest in notes or lines of credit with the CDLFs. Here at LOCUS, we
see an increase in foundations who care about a specific geographic region
investing in CDLFs for both a financial return and social impact in their
communities.
Community Development Loan Fund Performance, Risk and Impact
Impact Investors typically weigh fund performance, risk, and
the impact achieved in their investment decisions. Average interest rates paid
by CDLFs on notes have been very stable at 2.9% over the period; average interest
paid on the less-common lines of credit was also relatively stable at 3%. Housing-focused
funds paid the highest interest rates on notes, averaging at 3.0% or above.
Microenterprise funds paid the lowest interest rates on notes, with rates of
2.1% - 2.6% over the period.
Portfolio yields, a reflection of the interest rates CDLF’s
charge for loans, ranged from 5.2% to 5.4% on a weighted average basis over the
period. Microenterprise fund yields were highest at an average of 12.5%, and
housing-focused funds lowest at 4.2%, with businesses and community facilities
funds falling between. These discrepancies between portfolio yields and
respective interest rates reflect the higher costs associated with microenterprise
funds, which usually provide additional technical assistance to the
enterprises, versus the relatively lower expense ratios of housing-focused
funds.
CDLF’s demonstrated high portfolio quality, with write-offs
in 2016 at 0.6% of the portfolio outstanding. As one would expect, when broken
down by size, write-offs by small CDLFs were higher at 2.2% of portfolio
outstanding versus 0.2% for the largest CDLFs. Loan loss provisions at the end
of 2016 were at 4.9% of portfolio outstanding overall.
While most CDLF’s have a particular sector focus as noted
above, they also participate in other subsectors. Thus nearly 75% of the CDLFs
in the study provide loans in Financial Services (including individual loans
and microfinance) and Housing. Education, Healthcare, and Food &
Agriculture are other common sectors. Through these financial products, CDLFs
target a number of impacts. Employment generation (87% of CDLFs in the study),
affordable housing (71%), and food security (43%) are top impacts, with health
improvement, education, and financial inclusion also of notable interest. While
metric data in the study was very limited, the most common metrics tracked were
housing-related (units created or preserved, or people housed), the number of
jobs created or preserved, and students served.
Key Takeaways for U.S. Place-Based Investors
Despite their long tenure, CDLFs have been somewhat under
the radar in the impact investing space. This report highlights the strong
opportunities that CDLFs provide for institutions and individuals interested in
place-based impact investing in their U.S. region.
·
CDLFs
provide competitive, stable, low volatility returns with place-based impact.
With stable 2.9% returns with low volatility, CDLF’s are a strong fixed
income, place-based impact investment option. The vast majority of CDLFs in the
study were created over 25 years ago, and therefore have long tenures to
demonstrate their financial performance.
Given this relatively long track record to support the financial case,
they are an excellent gateway for those new to impact investing and should
remain a key component of a place-based investing strategy for all impact
investors.
·
CDLFs are
an excellent resource and potential partner for place-based impact investors.
CDLFs
relatively long tenure also provides a deep understanding of their local
economy and its players and needs, especially in regards to the underserved,
low-income, or marginalized members of the local community. With economic
factors playing a key role in most social missions, from housing to education
and health, CDLF’s insights can be very informative to the strategies of place-based
foundations, philanthropists, and investors. As nonprofits, CDLFs are reliant
on grants and contributions for their programs and services, and such support
can be a great way to begin a partnership. For investors interested in
developing new impact investing innovations, CDLF’s financial expertise renders
them a great potential partner for new programs or products.
To learn more about CDFIs and CDLFs serving your community,
visit The CDFI Fund and the Opportunity Finance Network (CDFI trade
association). Learn how LOCUS Impact Investing can help you assess CDLF
opportunities in your region by visiting our website.